What Exactly Is a Credit Limit?
Credit cards have a credit limit, which varies by card type and is determined by a variety of factors.
Apart from a variety of other considerations, the applicant’s income is one of the main factors that determines the credit limit when applying for a card.
The credit limit is the most a person can spend on a card that has been given to them.
So, if a card has an Rs. 100,000 spending limit, the user may spend up to that amount in a billing cycle.
Once the debt is cleared, the limit is reset to Rs. 100,000 for the following billing month. The CIBIL report contains information on all of your active credit cards, including their limits.
The Effect of Credit Limits on Credit Score
If you are a CIBIL defaulter and you need an online loan for CIBIL defaulters, let us now explore the influence of credit limitations on credit ratings, if any exist. As previously said, credit use is one of the five elements that influence credit scores. Credit usage is affected by credit card limits and card use.
Card Usage/Credit Limit – Credit Utilization
This is calculated for each card as well as for all cards combined. Thus, if a credit card has a maximum of Rs. 100,000 and the average billing is Rs. 35,000, the usage for that card is 35%.
If there is another card with 150,000 and the average use for that card is similarly 35,000, the utilization ratio for that card is 23.33%, and the usage for both cards together is 28%.
Thus, while calculating the score, the credit use of all cards, both individually and collectively, is taken into consideration. A high credit usage ratio is detrimental to one’s credit rating.
So, if someone’s credit card use is consistently high (more than 30% of the sanctioned amount), they should consider having a larger card limit sanctioned.
Increasing the credit limit will help the customer deal with the high credit utilization ratio; a consistently high credit utilization percentage may result in a negative CIBIL score.
This factor, together with repayment history, is the most important contributor to a credit score.
However, take into account that a higher credit card limit will only be helpful if you can pay your credit card bills on time and keep your spending under control.
A higher limit is not an excuse to spend more, since this defeats the point of having it raised and may lead to bigger difficulties if you fail to pay your bills on time.
Why Is Higher Credit Use a Problem?
Someone might ask why high usage is a problem if he or she can pay the credit card dues on time and spends within the sanctioned limit.
It is a concern since it discloses the card user’s credit-hungry habit. It also suggests a high-risk profile for the cardholder, both of which are healthy for credit health.
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Now That We Know What Can Affect Your Score
Loan and credit card payments made on time and in full help to keep your CIBIL rating good.
Having A Well-Balanced Product Mix
A balance of secured and unsecured loans demonstrates that a person is capable of managing finances well. This might assist you in improving your CIBIL score.
Check Your Credit Report on A Regular Basis
An incorrect input in your CIR (Credit Information Report) might have a negative impact on your score. It is advisable to review your report at regular times to verify that the score has not been negatively affected.
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